Federal Credit Unions Get Shield from Illinois Swipe Fee Law

Federal credit unions have secured a significant exemption from Illinois’ controversial interchange fee law, marking a notable development in the ongoing clash between financial institutions, merchants, and state regulators over payment processing costs.

The exemption, clarified through recent legal and regulatory interpretations, effectively shields federally chartered credit unions from compliance with Illinois’ Interchange Fee Prohibition Act (IFPA), which is set to take effect July 1, 2025. The law restricts the collection of interchange fees on portions of transactions tied to taxes and gratuities, creating operational and compliance challenges across the payments ecosystem.

Federal Preemption Takes Center Stage

At the heart of the exemption is the doctrine of federal preemption. Federal credit unions, governed by the Federal Credit Union Act and overseen by the National Credit Union Administration (NCUA), are generally insulated from state laws that interfere with their federally authorized powers.

Industry groups and legal analysts have argued that Illinois’ swipe fee restrictions would impose operational requirements inconsistent with federal regulations and card network rules. In this case, federal authority appears to override the state’s attempt to regulate interchange fee practices for federally chartered institutions.

The NCUA has not issued a sweeping formal rule on the matter, but legal consensus has increasingly aligned around the view that federal credit unions cannot be compelled to comply with the Illinois statute.

Compliance Divide Emerges

While federal credit unions may be exempt, the same cannot be said for state-chartered institutions, banks, and potentially credit unions operating under state authority. This creates a fragmented compliance environment:

• Federal credit unions: Likely exempt under federal preemption.

• State-chartered credit unions: May still be subject to Illinois law depending on state-level interpretations.

• Banks and card issuers: Facing pressure to adapt systems to comply with fee restrictions.

This uneven application raises concerns about competitive imbalance, with some institutions gaining relief from costly system modifications while others must invest heavily to comply.

Operational and Legal Uncertainty

The Illinois law has already drawn legal challenges from banking and payments industry groups, who argue that it conflicts with federal law, card network rules, and existing interchange frameworks.

Key operational concerns include:

• The inability of current payment systems to easily distinguish taxable and non-taxable portions of transactions in real time.

• Contractual conflicts with Visa and Mastercard rules governing interchange fees.

• Increased litigation risk tied to noncompliance or inconsistent application of the law.

For credit unions, the federal exemption provides some breathing room, but it does not fully eliminate uncertainty—particularly for institutions with hybrid charters or multi-state operations.

Broader Implications for the Industry

The Illinois law—and the emerging exemptions—could have ripple effects well beyond the state:

• Other states may pursue similar legislation targeting interchange fees.

• Federal preemption arguments could become a central battleground in future regulatory disputes.

• Payment processors and fintech firms may face growing pressure to develop more granular transaction-level data capabilities.

For the collections and credit industry, the implications are indirect but meaningful. Changes to interchange economics can influence lender profitability, credit availability, and the cost structure of servicing delinquent accounts—particularly where card-based payments are involved.

What Comes Next

Legal challenges to the Illinois law are ongoing, and further clarification from federal regulators or the courts is likely. In the meantime, institutions must navigate a patchwork of obligations while preparing for potential shifts in both state and federal policy.

For federal credit unions, the current exemption offers a temporary safeguard. For the broader industry, however, the fight over swipe fees—and the limits of state authority—appears far from settled.